<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
COMMISSION FILE NO. 001-12647
ORIENTAL FINANCIAL GROUP INC.
INCORPORATED IN THE COMMONWEALTH OF PUERTO RICO
IRS EMPLOYER IDENTIFICATION NO. 66-0259436
PRINCIPAL EXECUTIVE OFFICES:
68 MUNOZ RIVERA AVENUE
501 HATO REY TOWER
HATO REY, PUERTO RICO 00918
TELEPHONE NUMBER: (787) 766-1986
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK ($1.00 PAR VALUE)
9,965,940 SHARES OUTSTANDING AS OF SEPTEMBER 30, 1997
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No .
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
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<S> <C> <C>
PART - 1
ITEM - 1 FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 (UNAUDITED) AND JUNE 30, 1997. 1
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR THE
QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996. 2
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996. 3
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996. 4-5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6-11
ITEM - 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12-25
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PART - 2
ITEM - 1 LEGAL PROCEEDINGS - NONE 25
ITEM - 2 CHANGE IN SECURITIES - NONE 25
ITEM - 3 DEFAULTS UPON SENIOR SECURITIES - NONE 25
ITEM - 4 SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
ITEM - 5 OTHER INFORMATION - NONE 26
ITEM - 6 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 26
SIGNATURES 27
</TABLE>
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 (UNAUDITED) AND JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
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September 30, June 30,
1997 1997
<S> <C> <C>
------------- -------------
Cash and due from banks $ 13,724 $ 12,812
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MONEY MARKET INVESTMENTS:
Securities purchased under agreements to resell - 15,000
Time deposits with other banks 4,000 8,000
Other short-term investments, at cost 1,070 5,224
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TOTAL MONEY MARKET INVESTMENTS 5,070 28,224
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INVESTMENT SECURITIES AND OTHER INVESTMENTS:
Trading securities, at market 35,046 25,276
Investment securities available-for-sale, at market 256,992 203,261
Investment securities held-to-maturity, at cost 233,920 201,790
Federal Home Loan Bank (FHLB) stock, at cost 10,043 10,043
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TOTAL INVESTMENT SECURITIES AND OTHER INVESTMENTS 536,001 440,370
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LOANS:
Loans held for sale 28,882 29,285
Loans receivable 529,114 509,093
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TOTAL LOANS 557,996 538,378
Allowance for loan losses (5,454) (5,408)
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TOTAL LOANS, NET 552,542 532,970
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Accrued interest receivable 14,096 12,350
Foreclosed real estate, net 779 698
Premises and equipment, net 19,471 19,378
Other assets, net 20,081 21,794
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TOTAL ASSETS $ 1,161,764 $ 1,068,596
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 525,609 $ 497,542
Securities sold under agreements to repurchase 303,646 247,915
Borrowings under lines of credit - -
Advances and borrowings from Federal Home Loan Bank 91,700 89,800
Term notes and bonds payable 114,892 115,016
Accrued expenses and other liabilities 31,161 28,929
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TOTAL LIABILITIES 1,067,008 979,202
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Commitments and contingencies - -
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STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 5,000,000 shares authorized; none issued
Common stock, $1 par value; 20,000,000 shares authorized; 9,965,940
issued and outstanding in September 30,1997 and 7,989,787
issued and outstanding in June 30,1997. 9,966 7,990
Additional paid-in capital 26,990 28,631
Legal surplus 4,429 4,002
Retained earnings 52,975 49,694
Treasury stock, at cost, 81,200 shares at September 30, and June 30, 1997 (1,836) (1,836)
Unrealized gain on securities available-for-sale, net of taxes 2,232 913
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TOTAL STOCKHOLDERS' EQUITY 94,756 89,394
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,161,764 $ 1,068,596
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS ENDED ON SEPTEMBER 30, 1997 and 1996
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------
1997 1996
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<S> <C> <C>
INTEREST INCOME:
Loans 14,334 $ 12,950
Mortgage-backed securities 5,246 3,941
Investment securities 3,480 2,129
Other interest-earning assets 394 297
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TOTAL INTEREST INCOME 23,454 19,317
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INTEREST EXPENSE:
Deposits 6,356 4,587
Securities sold under agreements to repurchase 4,025 2,915
Other borrowed funds and interest rate risk management 3,188 2,899
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TOTAL INTEREST EXPENSE 13,569 10,401
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NET INTEREST INCOME 9,885 8,916
Provision for loan losses 1,300 900
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,585 8,016
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NON-INTEREST INCOME:
Bank service charges and fees 1,007 1,274
Trust, money management and brokerage fees 2,101 1,528
Mortgage banking activities 1,531 563
Gain on sale of investment securities 111 157
Trading account income 110 (30)
Rent and other operating income 186 182
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TOTAL NON-INTEREST INCOME 5,046 3,674
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NON-INTEREST EXPENSES:
Compensation and benefits 3,850 3,441
Occupancy and equipment 1,174 996
Professional fees 339 309
Advertising and promotion 665 341
Real estate owned expenses 29 67
Insurance, including deposit insurance 122 273
Communications 378 260
Other 1,169 843
SAIF one-time capitalization assessment - 1,823
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TOTAL NON-INTEREST EXPENSE 7,726 8,353
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INCOME BEFORE INCOME TAXES 5,905 3,337
Provision for income taxes 968 485
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NET INCOME $ 4,937 $ 2,852
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WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
Average common shares outstanding 9,903 9,915
Average common stock equivalents - options 325 408
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TOTAL 10,228 10,323
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INCOME PER COMMON SHARE $ 0.48 $ 0.28
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE QUARTERS ENDED ON SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
1997 1996
--------- ---------
COMMON STOCK:
Balance at beginning of period $ 7,990 $ 6,633
Five-for-four stock split 1,912 -
Six-for-five stock split - 1,318
Stock options exercised 64 19
Common stock repurchased and retired - (64)
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BALANCE AT END OF PERIOD 9,966 7,906
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--------- ---------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 28,631 31,234
Five-for-four stock split (1,912) -
Six-for-five stock split - (1,318)
Stock options exercised 271 54
Common stock repurchased and retired - (1,185)
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BALANCE AT END OF PERIOD 26,990 28,785
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--------- ---------
LEGAL SURPLUS:
Balance at beginning of period 4,002 2,498
Transfer from retained earnings 427 228
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BALANCE AT END OF PERIOD 4,429 2,726
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--------- ---------
RETAINED EARNINGS:
Balance at beginning of period 49,694 39,005
Net income 4,937 2,852
Dividends declared and cash paid on fractional shares (1,229) (989)
Transfer to legal surplus (427) (228)
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BALANCE AT END OF PERIOD 52,975 40,640
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--------- ---------
TREASURY STOCK:
Balance at beginning of period (1,836) -
Treasury stock purchased - -
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BALANCE AT END OF PERIOD (1,836) -
--------- ---------
--------- ---------
UNREALIZED GAIN (LOSS) ON SECURITIES
AVAILABLE-FOR-SALE, NET OF TAXES:
Balance at beginning of period 913 533
Net change in fair value of securities
available-for-sale, net of taxes 1,319 (368)
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BALANCE AT END OF PERIOD 2,232 165
--------- ---------
--------- ---------
TOTAL STOCKHOLDERS' EQUITY $ 94,756 $ 80,222
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED ON SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 4,937 $ 2,852
--------- ---------
--------- ---------
Adjustments to reconcile net income to net cash
(used in) operating activities:
Amortization of deferred loan origination
fees and costs (807) (710)
Amortization of premiums and accretion of discounts
mortgage-backed and investment securities 219 (125)
Depreciation and amortization of premises and equipment 597 504
Provision for loan losses 1,300 900
Gain on sale of available-for-sale securities (111) (157)
Mortgage banking activities (1,531) (563)
Increase in trading securities (9,880) (10,202)
Increase in accrued interest receivable (1,746) (71)
Decrease in other assets 1,713 371
Increase in accrued expenses and liabilities 1,784 1,953
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TOTAL ADJUSTMENTS (8,462) (8,100)
--------- ---------
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (3,525) (5,248)
--------- ---------
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in securities purchased under agreements to resell 15,000 3,829
Purchases of investment securities available-for-sale (49,401) (37,893)
Sales of investment securities available-for-sale 12,495 57,237
Maturities of investment securities available-for-sale 23,580 -
Purchases of investment securities held-to-maturity (36,424) (5,749)
Maturities and redemptions of investment securities held-to-maturity 4,191 1,190
Net origination of loans (57,313) (42,738)
Capital expenditures (690) (1,083)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES $ (88,562) $ (25,207)
--------- ---------
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</TABLE>
CONTINUED
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED ON SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Deposits $ 28,067 $ 16,185
Securities sold under agreements to repurchase 55,731 (18,082)
Borrowings under lines of credit - (10,000)
Advances and borrowings from FHLB 1,900 4,500
Issuance of term notes - 55,000
Payment of term notes - (8,000)
Principal payments of bonds payable (124) (198)
Proceeds from exercise of stock options 335 73
Repurchase of common stock - (1,249)
Dividends and cash paid on fractional shares (1,064) (748)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 84,845 37,481
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(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,242) 7,026
Cash and cash equivalents at beginning of period 26,036 16,955
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,794 $ 23,981
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CASH AND CASH EQUIVALENTS INCLUDE:
Cash and due from banks $ 13,724 $ 9,429
Time deposits with other banks 4,000 8,000
Other short-term investments 1,070 6,552
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$ 18,794 $ 23,981
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SUPPLEMENTAL DISCLOSURE:
Interest paid $ 13,200 $ 10,400
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Income taxes $ - $ -
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SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate foreclosed as payment of loans $ 80 $ 90
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Real estate loans securiticized into mortgage-backed securities $ 38,700 $ 34,700
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accounting and reporting policies of Oriental Financial Group (the
"Group", "Oriental") and its subsidiaries conform with generally accepted
accounting principles and with general practices within the banking industry.
The preparation of financial statements with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period and, as such, these statements include amounts based on
judgments and estimates made by Management. Actual results could differ from
those estimates.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with instructions for Form 10-Q. Complete information
regarding the financial statements can be found in the notes to the financial
statements for the year ended June 30, 1997 contained in Oriental's annual
report. Certain reclassifications have been made to the September 30, 1996
and June 30, 1997 consolidated financial statements to conform with the
presentation of the current period consolidated financial statements.
In the opinion of management, such unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial position at September
30, 1997 and June 30, 1997 as well as the results of operations and cash
flows for the three months ended September 30, 1997 and September 30, 1996.
The results of operations for the three months ended September 30, 1997 are
not necessarily indicative of the results to be expected for the entire year.
NOTE 2 - NATURE OF OPERATIONS:
The Group was incorporated on January 24,1997 under the laws of the
Commonwealth of Puerto Rico to serve as the bank holding company for Oriental
Bank and Trust (the "Bank"). As a result of this reorganization each of the
Bank's outstanding shares of common stock was converted into one share of
common stock of the new bank holding company.
The Group provides a wide variety of financial services through its
subsidiaries. Oriental Bank and Trust, the Group's bank subsidiary, is a
full-service commercial bank with its main office located in San Juan, Puerto
Rico and sixteen branches located throughout Puerto Rico. The Bank directly
or through its broker-dealer subsidiary, Oriental Financial Services Corp.,
offers commercial and consumer leasing, consumer lending, investment, money
management and brokerage services, corporate and individual trust services
and mortgage lending.
NOTE 3 - INCOME PER COMMON SHARE
Income per common share is calculated by dividing net income by the weighted
average of common shares and common stock equivalent shares outstanding after
giving retroactive effect to common stock dividends and splits. Common stock
equivalents are computed using the Treasury Stock Method. Stock options
outstanding under Oriental's stock option plan for officers and employees are
common stock equivalents and therefore, considered in the computation of
income per common share. The weighted average common shares and common stock
equivalent shares outstanding at September 30, 1997 and 1996 were 10,228,313
and 10,323,115, respectively. For the income per share calculation refer to
the consolidated statement of income at page 2.
NOTE 4 - INVESTMENT SECURITIES:
TRADING SECURITIES:
The Group classifies as trading debt and equity securities that are bought
and held principally for the purpose of selling them in the near term. The
securities are carried at estimated fair value with realized and unrealized
changes in market value recorded separately in the trading profit or loss
account in the period in which the changes occur. Interest revenue arising
from trading instruments are included in the statement of income as part of
net interest income rather than in the trading profit or loss account.
6
<PAGE>
The fair value of trading securities is based on quoted market prices. At
September 30, 1997 and and June 30, 1997 , the amortized cost and fair
market value of securities held for trading were $34,948,000 and $35,046,000
and $25,255,000 and $25,276,000,respectively. At September 30, 1997, gross
holding unrealized gains and gross unrealized losses amounted to $104,000 and
$6,000, respectively.
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The Group classifies as available-for-sale debt and equity securities not
classified as either held-to-maturity or trading securities. These securities
are reported at fair value, with unrealized gains and losses excluded from
earnings and reported net of deferred taxes as a separate component of
stockholders' equity. The estimated fair value of investment securities is
based on quoted market prices or dealer quotes. Expected maturities of
mortgage-backed securities may differ from contractual maturities because of
prepayments and other market factors. The amortized cost , estimated fair
value, weighted average yield and related contractual maturities of debt and
equity securities available-for-sale by category at September 30, and June
30, 1997 are as follows ( in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1997
---------------------------------- ----------------------------------
AVERAGE AVERAGE
AMORTIZED FAIR WEIGHTED AMORTIZED FAIR WEIGHTED
COST VALUE YIELD COST ALUE YIELD
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
UNITED STATES GOVERNMENT OBLIGATIONS:
Average maturity of 5 years and 9 months at
September and 5 years and 1 month at June.
Due from one to five years $ 42,838 $ 43,614 6.92% $ 62,847 $ 63,197 6.76%
Due from five to ten years 118,350 119,766 6.42 47,339 47,435 6.78
-------- -------- ----- -------- -------- ------
161,188 163,380 6.59 110,186 110,632 6.77
-------- -------- ----- -------- -------- ------
PUERTO RICO GOVERNMENT OBLIGATIONS:
Average maturity of 9 years and 7 months at
September and 8 years and 4 months at June.
Due from one to five years 5,188 5,170 5.55 5,212 5,170 5.55
Due over ten years 27,455 27,514 8.00 28,879 29,107 7.97
-------- -------- ----- -------- -------- ------
32,643 32,684 7.61 34,091 34,277 7.60
-------- -------- ----- -------- -------- ------
MORTGAGE - BACKED SECURITIES:
Average maturity of 20 years and 6 months at
September and 20 years and 9 months at June.
Due from one to five years 439 431 5.94 416 408 5.94
Due from five to ten years 1,590 1,620 6.89 797 807 6.98
Due over ten years 58,155 58,877 6.88 56,553 57,137 6.91
-------- -------- ----- -------- -------- ------
60,185 60,928 6.87 57,766 58,352 6.90
-------- -------- ----- -------- -------- ------
$254,016 $256,992 6.79% $202.043 $203,261 6.94%
-------- -------- ----- -------- -------- ------
-------- -------- ----- -------- -------- ------
</TABLE>
At September 30, and June 30, 1997 mortgage-backed securities available-for-sale
consisted of (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1997
----------------------- -------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------------------- -------------------------
<S> <C> <C> <C> <C>
MORTGAGE - BACKED SECURITIES:
GNMA $39,940 $40,501 $47,274 $47,832
FHLMC 20,191 20,361 10,438 10,454
Mortgage Pass Through Certificates 54 66 54 66
------- ------- ------- -------
$60,185 $60,928 $57,766 $58,352
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
7
<PAGE>
The Puerto Rico government obligations due over ten years category includes an
AAA-rated mortgage-backed Puerto Rico municipal bond with a fair value of
$27,514,000 which commenced paying down principal on August 1, 1994, and is
expected to be fully collected during 1998.
At September 30, 1997, gross unrealized gains and gross unrealized losses
amounted to $3,092,000 and $116,000, respectively. These amounted to $1,620,000
and $402,000, respectively at June 30, 1997. At September 30, and June 30, 1997
unrealized gains on securities available-for-sale of $2,232,000 and $913,000,
respectively, net of deferred income tax of $744,000 and $305,000 respectively,
were reported as a separate component of stockholders' equity.
Proceeds from the sale of investment securities available-for-sale during the
three months period ended September 30, 1997, were $12,495,000. Gross realized
gains and losses on those sales during the year were $157,000 and $46,000,
respectively.
INVESTMENT SECURITIES HELD-TO-MATURITY:
The Group classifies as held-to-maturity debt securities for which the Group has
the positive intent and ability to hold to maturity. These securities are
carried at amortized cost. Expected maturities of mortgage-backed securities may
differ from contractual maturities because of prepayments and other market
factors. The carrying value, estimated fair value, weighted average yield and
related contractual maturities of debt and equity securities held-to-maturity
by category at September 30, and June 30, 1997 are as follows ( in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1997
---------------------------------- ----------------------------------
AVERAGE AVERAGE
AMORTIZED FAIR WEIGHTED AMORTIZED FAIR WEIGHTED
COST VALUE YIELD COST ALUE YIELD
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
PUERTO RICO GOVERNMENT OBLIGATIONS:
Average maturity of 8 years at September
and 8 years and 3 months at June.
Due from five to ten years $ 1,010 $ 1,020 6.73% $ 1,013 $ 1,020 6.73
Due over ten years 2,573 2,608 7.69 2,583 2,588 7.69
-------- -------- ----- -------- -------- ----
3,583 3,608 7.41 3,586 3,608 7.41
-------- -------- ----- -------- -------- ----
MORTGAGE - BACKED SECURITIES:
Average maturity of 17 years and 7 months at
September and 14 years and 6 months at June.
Due from one to five years 162 164 7.45 261 261 6.27
Due from five to ten years 4,786 4,868 6.82 3,285 3,346 6.99
Due over ten years 225,389 227,693 7.26 194,658 195,228 6.97
-------- -------- ----- -------- -------- ----
230,337 232,725 7.25 198,204 198,835 6.97
-------- -------- ----- -------- -------- ----
$233,920 $236,333 7.25% $201,790 $202,443 6.94%
-------- -------- ----- -------- -------- ----
-------- -------- ----- -------- -------- ----
</TABLE>
The mortgage-backed securities due over ten years category includes
approximately $83,000,000 of the short end of certain Puerto Rico GNMA tax
exempt serial certificates with an average expected life of 4 to 6 years. At
September 30, mortgage-backed securities held-to-maturity were comprised of the
following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1997
----------------------- -----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------------------- -----------------------
<S> <C> <C> <C> <C>
MORTGAGE - BACKED SECURITIES:
GNMA $ 148,127 $ 149,005 $ 149,275 $ 149,081
FNMA 72,985 73,668 38,439 38,650
FHLMC 6,155 6,341 7,205 7,369
Mortgage Pass Through Certificates 3,070 3,711 3,285 3,735
--------- --------- --------- ---------
$ 230,337 $ 232,725 $ 198,204 $ 198,835
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Gross unrealized gains and gross unrealized losses at September 30, 1997
amounted to $2,881,000 and $470,000 respectively. These amounted to $1,652,000
and $999,000, respectively, at June 30, 1997.
8
<PAGE>
FEDERAL HOME LOAN BANK STOCK:
At September 30, and June 30, 1997 there was an investment in Federal Home
Loan Bank (FHLB) of New York Stock with a book and fair value of $10,043,000
and $10,043,000, respectively. The fair value of such investment is its
redemption value.
NOTE 5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES:
The Group's business activity is with consumers located in Puerto Rico.
Oriental's loan transactions include a diversified number of industries and
activities such as individuals, sole proprietorships, partnerships,
manufacturing, tourism, government, insurance and not-for-profit
organizations, all of which are encompassed within four main categories:
mortgage, commercial, consumer and leasing. Oriental's loan portfolio has a
higher concentration of loans to consumers such as auto leases and
residential mortgage loans. The composition of the loan portfolio at
September 30, and June 30, 1997 was as follows (in thousands):
SEPTEMBER 30, JUNE 30,
1997 1997
---------- ----------
LOANS SECURED BY REAL ESTATE:
Residential $ 235,091 $ 225,143
Commercial 8,949 9,087
Home equity loans 5,630 5,436
Construction, land acquisition and land
improvements 4,533 4,391
---------- ----------
254,203 244,057
Less: undisbursed portion of loans in process (1,173) (2,093)
---------- ----------
LOANS SECURED BY REAL ESTATE, NET 253,030 241,964
---------- ----------
---------- ----------
OTHER LOANS:
Commercial loans 11,129 10,512
Auto loans 13,333 14,882
Personal loans 79,629 69,773
Personal lines of credit 5,834 5,190
Cash collateral loans 2,244 2,827
Financing leases 203,990 205,077
---------- ----------
316,164 308,261
Less: unearned interest (40,075) (41,131)
---------- ----------
OTHER LOANS, NET 276,084 267,130
---------- ----------
---------- ----------
Loans receivable 529,114 509,093
Allowance for loan losses (5,454) (5,408)
---------- ----------
LOANS RECEIVABLE, NET 523,660 503,685
Loans held for sale 28,882 29,285
---------- ----------
TOTAL LOANS,NET $ 552,542 $ 532,970
---------- ----------
---------- ----------
The Group provides allowances for estimated loan losses based on an
evaluation of the risk characteristics of the loan portfolio, loss
experience, economic conditions and other pertinent factors. Loan losses are
charged and recoveries are credited to the allowance for loan losses.
The Group measures impairment of a loan based on the present value of
expected future cash flows discounted at the loan's effective interest rate,
or as a practical expedient, at the observable market price of the loan or
the fair value of the collateral, if the loan is collateral dependent. All
loans are evaluated for impairment, except large groups of small balance,
homogeneous loans that are collectively evaluated for impairment, leases and
loans that are recorded at fair value or at the lower of cost or fair value.
The Group measures for impairment all commercial loans and leases over
$250,000. The portfolios of mortgage and consumer loans and auto loans and
leases are considered homogeneous and are evaluated collectively for
impairment. Over 95% of the group's loan portfolio is composed of smaller
homogenous loans which are evaluated collectively for impairment.
Accordingly, the balance of impaired commercial loans and leases at
september 30, 1997 and 1996 and their average for the quarter is not
significant.
9
<PAGE>
Refer to Table D at page 19 of the management's discussion and analysis of
financial condition and results of operations for the changes in the
allowance for loan losses for the first quarter ended September 30, 1997 and
1996.
NOTE 6 - ADVANCES AND BORROWINGS FROM THE FEDERAL HOME LOAN BANK:
At September 30, and June 30, 1997 advances and borrowings from the Federal
Home Loan Bank of New York (FHLB) consist of the following (in thousands):
<TABLE>
<CAPTION>
TYPE SEPT. 30, JUNE 30, MATURITY DATE INTEREST RATE DESCRIPTION
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ADVANCE $ - $15,000 JULY 1997 Fixed - 5.79%
ADVANCE - 15,000 AUGUST 1997 Fixed - 5.80%
ADVANCE 15,000 - OCTOBER 1997 Fixed - 5.75%
ADVANCE 10,000 10,000 NOVEMBER 1997 Floating due quarterly - 5.74% at 9/30/97
ADVANCE 10,000 10,000 FEBRUARY 1998 Floating due monthly - 5.71% at 9/30/97
ADVANCE 12,700 13,800 OVERNIGHT LINE OF CREDIT Floating due daily - 6.75% at 9/30/97
ADVANCE 10,000 - SEPTEMBER 1999 Fixed - 5.71% - Callable March 1998
ADVANCE 10,000 - SEPTEMBER 1999 Fixed - 5.85% - Callable September 1998
BORROWING - 12,000 SEPTEMBER 1997 Fixed - 6.04%
BORROWING 14,000 14,000 JULY 1998 Fixed - 6.28%
BORROWING 10,000 - SEPTEMBER 1999 Fixed - 6.03% - Callable March 1999
-------------------
$91,700 $89,800
-------------------
-------------------
</TABLE>
Advances are received from the FHLB under an agreement whereby Oriental is
required to maintain a minimum amount of qualifying collateral with a market
value of at least 110% of the outstanding advances. The floating rate
advances are considered generally hedged through the overall interest rate
risk management process discussed in note 8.
NOTE 7 - TERM NOTES AND BONDS PAYABLE:
At September 30, and June 30, 1997 Term Notes and Bonds Payable consist of
the following ( in thousands):
<TABLE>
<CAPTION>
TYPE SEPT. 30, JUNE 30, MATURITY DATE INTEREST RATE DESCRIPTION
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TERM NOTE $ 8,000 $ 8,000 OCTOBER 1998 Fixed - 4.81%
TERM NOTE 10,000 10,000 DECEMBER 1999 Floating due quarterly - 4.62% at 9/30/97 (a) (c)
TERM NOTE 10,000 10,000 JANUARY 2000 Floating due quarterly - 4.62% at 9/30/97 (a) (c)
TERM NOTE 6,500 6,500 DECEMBER 2000 Floating due quarterly - 4.78% at 9/30/97 (b) (c)
TERM NOTE 20,000 20,000 MARCH 2001 Floating due quarterly - 5.29% at 9/30/97 (b) (c)
TERM NOTE 10,000 10,000 SEPTEMBER 2001 Floating due quarterly - 5.51% at 9/30/97 (b) (c)
TERM NOTE 30,000 30,000 SEPTEMBER 2001 Floating due quarterly - 5.29% at 9/30/97 (b) (c)
TERM NOTE 5,000 5,000 DECEMBER 2001 Floating due quarterly - 4.83% at 9/30/97 (b) (c)
TERM NOTE 15,000 15,000 MARCH 2007 Floating due quarterly - 5.34% at 9/30/97 (b) (c)
BOND 392 516 APRIL 2008 Fixed - 8.38% (d)
-------------------
$114,892 $115,016
-------------------
-------------------
</TABLE>
(A) - GUARANTEED BY LETTERS OF CREDIT FROM THE FLHB.
(B) - COLLATERALIZED WITH U.S. GOVERNMENT SECURITIES AND/OR MORTGAGE-BACKED
SECURITIES.
(C) - THE FLOATING RATE NOTES ARE CONSIDERED GENERALLY HEDGED THROUGH THE
OVERALL INTEREST RATE RISK MANAGEMENT PROCESS DISCUSSED IN NOTE 8.
(D) - COLLATERIZED WITH FHLMC CERTIFICATES.
10
<PAGE>
NOTE 8- INTEREST RATE RISK MANAGEMENT
INTEREST RATE SWAP AGREEMENTS
The following table indicates the types of swaps used and their terms at
September 30, 1997 (in thousands):
Pay fixed swaps - notional amount $385,000
Weighted average pay rate - fixed 5.77%
Weighted average receive rate - floating 5.39%
Maturity (in months) 1 to 32
Floating rate - percent of LIBOR 84 to 100%
The agreements were signed to convert short term borrowings into fixed rate
liabilities for longer periods of time and provide protection against
increases in interest rates. The amounts potentially subject to credit loss
are the net streams of payments under the agreements and not the notional
principal amounts used to express the volume of the swaps. The Group
controls the credit risk of its interest rate swap agreements through
approvals, limits, monitoring procedures and collateral, where considered
necessary. The Group does not anticipate nonperformance by the
counterparties. At September 30, 1997, interest rate swap maturities by
fiscal year are as follows (in thousands):
YEAR ENDING JUNE 30, AMOUNT
-------------------- --------
1998 $180,000
1999 195,000
2000 10,000
--------
$385,000
--------
--------
The following table summarizes the changes in notional amounts of swaps
outstanding during three months period ended on September 30, 1997 (in
thousands):
Balance at June 30, 1997 $370,000
New swaps 25,000
Maturities (10,000)
--------
BALANCE AT SEPTEMBER 30, 1997 $385,000
--------
--------
INTEREST RATE PROTECTION AGREEMENTS (CAPS)
The Group also uses interest rate protection agreements (Caps) to limit its
exposure to rising interest rates. Under these agreements, Oriental pays an
up front premium or fee for the right to receive cash flow payments in excess
of the predetermined cap rate; thus, effectively capping its interest rate
cost for the duration of the agreement. The following table indicates the
agreements outstanding at September 30, 1997 (in thousands):
Cap agreements - notional amount $100,000
Cap rate 6.00 - 6.50%
Current 90 day LIBOR 5.77%
Maturity (in months) 14 to 29
S&P INTEREST RATE SWAP
In January 1994, the Group introduced new certificates of deposit called
Investors' CD and Investors' IRA which have their yields tied to the
performance of a stock market index. At the end of five years, the depositor
will receive a specified percent of the average increase of the month-end
value of the Standard & Poor's 500 stock index. If such index decreases, the
depositor receives the principal without any interest. The Group has entered
into interest rate swap/hedge agreements with a notional amount of
$29,432,000 with major money center banks to manage the Investors' CD and IRA
exposure to the stock market. Under the terms of the agreements, Oriental
will receive the average increase of the month-end value of the Standard and
Poor's index in exchange for a semiannual fixed interest cost. Thus, the
Group has exchanged the variable interest payment for a known fixed rate
semiannual interest payment. At September 30, 1997 total Investors' CD and
IRA deposits amounted to $30,762,000.
11
<PAGE>
ORIENTAL FINANCIAL GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL REVIEW SUMMARY
Oriental Financial Group reported an increase of 18% in net operating
profits for the first quarter of fiscal 1998. The Group's net operating
profits for the first quarter of fiscal 1998 increased to $4,936,918 from
$4,184,795 (excluding a special reserve of $1.3 million, net of taxes,
recorded during the first quarter of 1997 to account for its share of a
one-time industry-wide SAIF assessment) in the same period of fiscal 1997.
On a per share basis, net operating profits rose to $.48 a share against
$.41 a share a year earlier for a 17% gain. All per share figures have been
retroactively adjusted for the five-for-four (25%) stock split on common
stock held by registered shareholders as of september 30, 1997 to be
distributed on october 15, 1997.
Net income (including the one-time industry-wide SAIF assessment in fiscal
1997) increased to $4,936,918 or $.48 per share compared to $2,852,295 or
$.28 per share in fiscal 1997, an increase of 73%. The Group's earnings
growth reflects increases in both interest income and non-interest income,
driven by a solid growth in interest-earning assets and fee revenues.
Oriental continued to experience a favorable growth in its diversified
asset base which contributed to income expansion across all its business
lines. Total financial assets owned or managed increased 32% to $3.3 billion
at September 30, 1997 from the $2.5 billion owned or managed one year ago.
As of September 30, 1997, total financial assets consisted of $1.16 billion
owned by the Bank, $1.1 billion managed by the trust, $544 million gathered
by the broker-dealer and $533 million in mortgages serviced for third
parties.
In a move to strengthen its future earnings the Group announced in
September the sale of its servicing operation to Doral Financial Corporation.
Management expects the mortgage servicing transaction to be completed by
November 30, 1997. The divestiture of the mortgage servicing operation is
indicative of a wider strategy guiding the Group to concentrate on trust,
money management, brokerage, leasing, personal loans and deposit accounts
with the highest earnings potential.
During the first quarter of fiscal 1998 recurring non-interest income
increased by $1.3 million or 36% to $4.8 million from $3.5 million reported
in the same quarter of fiscal 1997. Trust and money management fees, service
charges and other income increased 14% to $3.3 million, compared to $2.9
million in the same quarter of fiscal 1997. Mortgage banking activities
increased 172% to $1.5 million, compared to $563,000 for the same period
fiscal 1997. Non recurring non-operating interest income, which consists
mainly of securities and trading gains and losses, amounted to $221,000 for
the first quarter fiscal 1998 versus $127,000 for the same period of last
year.
Net interest income before provision for loan losses rose to $9.9 million
for the first quarter of fiscal 1998, compared to $8.9 million reported
during the same period of fiscal 1997, an increase of 11%. The increase in
net interest income resulted from growth in the Group's loan portfolio and
other interest-earning assets. Average interest-earning assets for the first
quarter of fiscal 1998 increased by 26% to $1.05 billion, compared to $837
million in the same period of fiscal 1997.
For the first quarter of fiscal 1998 the Group provided $1.3 million for
loan losses compared with $900,000 for the same period of fiscal 1997, an
increase of $400,000 or 44%. The increase in the provision for fiscal 1998
was based on the growth of the Group's loan portfolio, as well as a rise in
net charge-offs experienced by the Group and current and expected economic
conditions.
Recurring non-interest expenses (excluding the $1.8 million recorded
during the first quarter of 1997 to account for the one-time industry-wide
SAIF assessment) for the first quarter of fiscal 1998 increased by $1.2
million or 18% to $7.7 million as compared to $6.5 million during the same
period of fiscal 1997. The increase results mainly from the expanded push in
the retail area and higher outlays for support services as the Group's
businesses continue to expand. The efficiency ratio, which is the ratio of
non-interest expense to the sum of net interest income and recurring
non-interest income, was 52.52% for the first quarter of fiscal 1998 compared
to 52.40% a year ago. The expense ratio, which is the ratio of net recurring
operating expenses to average interest-earning assets, improved to 1.11%
for the first quarter of fiscal 1998, compared to 1.43% last year.
Oriental Bank total assets at September 30, 1997 reached $1.16 billion,
an increase of 26% when compared to $919 million at the end of the same
period of fiscal 1997. This resulted from the growth in investment and
trading securities of $159 million, or 42%, to $541 million from $382 million
a year ago, and loans receivable and loans held for sale, net of the
allowance for loan losses, of $69 million, or 14%, from $484 million at
September 30, 1996 to $553 million at september 30, 1997. In response to the
change in asset mix, return on average assets amounted to 1.71% versus 1.86%
during the same period of last year.
12
<PAGE>
ORIENTAL FINANCIAL GROUP
FINANCIAL HIGHLIGHTS
IN THOUSANDS (EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
----------------------------
PERCENT FISCAL
INCREASE ----------------------------
(DECREASE) 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PERIOD END BALANCES:
INTEREST-EARNING ASSETS 26% $ 1,093,613 $ 865,923
--------- ----------- ------------
TOTAL BANK ASSETS 26% 1,161,764 919,219
--------- ----------- ------------
TOTAL FINANCIAL ASSETS 32% 3,342,900 2,540,200
--------- ----------- ------------
INTEREST-BEARING LIABILITIES 28% 1,035,847 809,764
--------- ----------- ------------
TOTAL LIABILITIES 27% 1,067,008 838,998
--------- ----------- ------------
CAPITAL 18% $ 94,756 $ 80,221
--------- ----------- ------------
OPERATING RESULTS:
INTEREST INCOME 21% $ 23,454 $ 19,317
INTEREST EXPENSE 30% 13,569 10,401
--------- ----------- ------------
NET INTEREST INCOME 11% 9,885 8,916
PROVISION FOR LOAN LOSSES 44% 1,300 900
--------- ----------- ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7% 8,585 8,016
--------- ----------- ------------
BANK SERVICE CHARGES AND FEES AND OTHER INCOME -18% 1,193 1,456
TRUST, MONEY MANAGEMENT AND BROKERAGE FEES 38% 2,101 1,528
MORTAGE BANKING ACTIVITIES 172% 1,531 563
NET GAIN ON SALE OF INVESTMENT SECURITIES 74% 221 127
NON-INTEREST EXPENSES 18% 7,726 6,530
SPECIAL SAIF ONE-TIME CAPITALIZATION ASSESSMENT -100% - 1,823
--------- ----------- ------------
NET INCOME BEFORE INCOME TAXES 77% 5,905 3,337
PROVISION FOR INCOME TAXES 100% 968 485
--------- ----------- ------------
NET INCOME 73% 4,937 2,852
SAIF ASSESSMENT, NET OF INCOME TAXES -100% - 1,333
--------- ----------- ------------
NET OPERATING INCOME (EXCLUDING SAIF ASSESSMENT) 18% $ 4,937 $ 4,185
--------- ----------- ------------
PER SHARE DATE:
NET INCOME EXCLUDING SAIF 17% $ 0.48 $ 0.41
--------- ----------- ------------
BOOK VALUE 17% 9.51 8.12
--------- ----------- ------------
MARKET PRICE 121% 28.80 13.03
--------- ----------- ------------
DIVIDENDS DECLARED 24% 1,229 989
--------- ----------- ------------
OUTSTANDING SHARES AT END OF PERIOD 1% $ 9,966 $ 9,883
--------- ----------- ------------
FINANCIAL RATIOS:
RETURN ON AVERAGE ASSETS 1.71% 1.86%
=========== ============
RETURN ON AVERAGE EQUITY 21.19% 20.60%
=========== ============
EFFICIENCY RATIO 52.52% 52.40%
=========== ============
EXPENSE RATIO 1.11% 1.43%
=========== ============
</TABLE>
13
<PAGE>
Stockholders' equity at September 30, 1997 reached $95 million compared to $80
million at September 30, 1996. The Group continues to be a "well capitalized"
institution, the highest classification available under the capital standards
set by the Federal Deposit Insurance Corporation for bank or bank holding
companies. Total risk-based and leverage capital ratios as of September 30, 1997
were 18.47% and 7.72%, respectively, which are well above the minimum capital
ratios required by regulatory agencies. Return on average equity improved to
21.18% from 20.60%.
Oriental Financial Group is a bank holding company, established in fiscal 1997,
to provide greater flexibility in managing the diversified financial services
offered to clients throughout Puerto Rico. The core businesses of the Group are
trust, money management, financial planning and investment brokerage services,
as well as consumer banking through a 16 branch islandwide network, which
concentrates on serving the market with auto and equipment lease financing,
mortgage lending, personal loans and deposit accounts.
The following pages discuss in detail the different components that resulted in
the Group's continued profitability.
RESULT OF OPERATIONS
As a diversified financial services provider, Oriental's earnings depend not
only on the net interest income generated from its banking activity, but also
from fees and other non-interest income generated from the wide array of
financial services offered. Net interest income is affected by the difference
between rates of interest earned on the Group's interest-earning assets and
rates paid on its interest-bearing liabilities (interest rate spread) and the
relative amounts of its interest-earning assets and interest-bearing liabilities
(interest rate margin). Non-interest income is affected by the level of trust
assets under management, transactions generated by gathering of financial assets
by the broker-dealer subsidiary, the level of mortgage banking activities, and
fees generated from loans and deposit accounts.
NET INTEREST INCOME
Net interest income for the first quarter of fiscal 1998 increased by $1
million or 11% to $ 9.9 million from $8.9 million in fiscal 1997. The
improvement in net interest income was the result of an increase of $1.2
million due to a higher volume of net interest earning assets partially
offset by an unfavorable effect in rate of $274,000 due to a lower average
yield of interest-earning assets and a slight increase in the cost of funds.
The interest rate spread and net interest margin for the first quarter of
fiscal 1998 fell to 3.57% and 3.79%, respectively, as compared to 3.98% and
4.29%, respectively, for fiscal 1997. At the end the first quarter of fiscal
1998 total average interest-earning assets exceeded total average interest
bearing liabilities by $44.3 million for a interest-earning assets to
interest-bearing liabilities ratio of 104.41% versus $50 million and 106.37%,
respectively, in fiscal 1997.
Table A on page 15 sets forth a detailed analysis of net interest income.
Part one presents the dollar amount of and average rates on Oriental's
interest-earning assets and liabilities, the ratio of net interest-earning
assets over interest-bearing liabilities, the average interest rate spread
and the net yield on average interest-earning assets. Part two describes the
extent to which changes in interest rates and changes in volume of
interest-related assets and liabilities have affected Oriental's interest
income and interest expense during the periods indicated. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (1) changes in volume (changes in volume
multiplied by old rates) and (2) changes in rate (changes in rate multiplied
by old volume). Rate-volume variances (changes in rates multiplied by the
changes in volume) have been proportionally allocated to the changes in
volume and changes in rate based upon their respective percentage of the
combined total.
Oriental's interest income for the first quarter of fiscal 1998 increased by
$4.1 million or 21% to $23.4 million from $19.3 million posted in fiscal
year 1997. The growth in interest income results from a rise of $4.3 million
due to a higher average volume of interest-earning assets. Average
interest-earning assets increased to $1.05 billion for the first quarter of
fiscal 1998 compared with $836 million in fiscal 1997. To a lesser extent,
interest income was negatively affected by $133,000 due to the lower yields
attained on interest-earning assets.
The increase in the average volume of interest-earning assets for the first
quarter fiscal 1998 relates primarily to rise in investment and
mortgage-backed securities of $85 million or 72% and $72 million or 33%,
respectively. There were two main reasons for the increase in investment and
mortgage-backed securities. First, was the creation, during the latter part
of fiscal 1997, of OBT International Branch under the International Banking
Center Law which invests primarily in U.S. mortgage-baked securities that
provide the Group significant tax advantages. Finally, was a shift in the
Group's investing strategy due to the change in the GNMA's tax-exemption in
July 1997. For more on this change to the Puerto Rico tax code refer to the
income taxes section of this report at page 18. The end result of these
changes is that total investments amounted to 49% of average interest-earning
assets in fiscal 1998 versus 44% in fiscal 1997.
14
<PAGE>
<TABLE>
<CAPTION>
TABLE - A FIRST QUARTER ENDED SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------------------------
PART - I FISCAL 1998 FISCAL 1997
- ------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
INTEREST BALANCE RATE INTEREST BALANCE RATE
--------- ---------- ------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
REAL ESTATE LOANS $ 6,493 $ 273,852 9.48% $ 5,785 $ 235,328 9.83%
CONSUMER LOANS 3,050 89,911 13.46% 2,458 79,240 12.31%
COMMERCIAL LOANS 293 9,599 12.20% 187 7,190 10.44%
FINANCING LEASES 4,498 158,455 11.35% 4,520 150,699 12.00%
-------- ---------- ------ -------- ---------- ------
TOTAL LOANS 14,334 531,817 10.76% 12,950 472,457 10.94%
-------- ---------- ------ -------- ---------- ------
MORTAGE-BACKED SECURITIES 5,246 292,448 7.18% 3,941 219,472 7.18%
INVESTMENT SECURITIES 3,480 204,872 6.79% 2,129 119,341 7.14%
OTHER INTEREST-EARNING ASSETS 394 20,844 7.40% 297 24,419 4.76%
-------- ---------- ------ -------- ---------- ------
TOTAL INVESTMENTS 9,120 518,164 7.03% 6,367 363,232 7.00%
-------- ---------- ------ -------- ---------- ------
TOTAL INTEREST-EARNING ASSETS $ 23,454 $1,049,981 8.92% 19,317 $ 835,689 9.23%
-------- ---------- ------ -------- ---------- ------
INTEREST-BEARING LIABILITIES
DEPOSITS $ 6,356 $ 508,781 4.96% $ 4,587 $ 374,975 4.85%
REPURCHASE AGREEMENTS 4,025 294,822 5.42% 2,915 252,944 4.57%
LINES OF CREDIT 14 - 0.00% 125 6,427 7.60%
FHLB ADVANCES 902 61,506 5.82% 434 31,233 5.51%
FHLB BORROWINGS 398 25,578 6.17% 403 26,000 6.15%
BONDS PAYABLE 11 482 8.77% 19 895 8.70%
TERM NOTES 1,518 114,500 5.26% 1,271 93,200 5.41%
INTEREST RATE RISK MANAGEMENT 345 YIELD AJE. 0.28% 647 YIELD AJE. 0.62%
-------- ---------- ------ -------- ---------- ------
TOTAL INTEREST-BEARING LIABILITIES $ 13,569 $1,005,669 5.35% $ 10,401 $ 785,674 5.25%
-------- ---------- ------ -------- ---------- ------
NET INTEREST EARNING ASSETS $ 9,885 $ 44,312 3.57% $ 8,916 $ 50,015 3.98%
-------- ---------- ------ -------- ---------- ------
INTEREST RATE MARGIN 3.79% 4.29%
---------- ----------
NET INTEREST-EARNING ASSETS RATIO 104.41% 106.37%
-------- ---------
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1998 COMPARED TO 1997
- ----------------------------------------------------------------------------
PART - II INCREASE/(DECREASE) DUE TO:
- ----------------------------------------------------------------------------
VOLUME RATE TOTAL
--------- -------- ---------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
REAL ESTATE LOANS $ 914 $ (206) $ 708
CONSUMER LOANS 365 228 593
COMMERCIAL LOANS 73 32 105
FINANCING LEASES 220 (242) (22)
-------- -------- ---------
TOTAL LOANS 1,572 (188) 1,384
-------- -------- ---------
MORTAGE-BACKED SECURITIES 1,309 (4) 1,305
INVESTMENT SECURITIES 1,453 (102) 1,351
OTHER INTEREST-EARNING ASSETS (64) 161 97
-------- -------- ---------
TOTAL INVESTMENTS 2,698 55 2,753
-------- -------- ---------
TOTAL INTEREST-EARNING ASSETS $ 4,270 $ (133) $ 4,137
-------- -------- ---------
INTEREST-BEARING LIABILITIES
DEPOSITS $ 1,672 $ 97 $ 1,769
REPURCHASE AGREEMENTS 577 533 1,110
LINES OF CREDIT 11 (122) (111)
FHLB ADVANCES 443 25 468
FHLB BORROWINGS (6) 1 (5)
BONDS PAYABLE (8) - (8)
TERM NOTES 282 (35) 247
INTEREST RATE RISK MANAGEMENT 56 (358) (302)
-------- -------- ---------
TOTAL INTEREST-BEARING LIABILITIES $ 3,027 $ 141 $ 3,168
-------- -------- ---------
NET INTEREST INCOME $ 1,243 $ (274) $ 969
-------- -------- ---------
</TABLE>
15
<PAGE>
The yield on interest-earning assets for the first quarter of fiscal 1998
decreased to 8.92% from 9.23% attained in the same period of fiscal 1997. The
main reason for this decline was the proportionately higher increase in the
total average investments portfolio, which carries a lower yield than the loan
portfolio, as previously discussed.
Interest expense for the first quarter of fiscal 1998 increased to $13.6
million from $10.4 million reported in the same period of fiscal 1997, an
increase of $3.2 million or 30%. This is result of a higher volume of
interest-bearing liabilities used to fund the increase in interest-earning
assets. This increase in volume contributed to a rise in total interest expense
of $3 million during the first quarter of fiscal 1998. The Group's average
interest-bearing liabilities rose by $219 million or 28% to $1 billion in fiscal
1998 compared with $786 million during fiscal 1997.
The growth in average volume was mainly attributed to the significant increase
in the average volume of deposits and term notes. For the first quarter of
fiscal 1998 the average volume of deposits grew by $134 million or 36% while the
average volume of term notes increased by $21.3 million or 23%. The increase in
deposits was concentrated in certificates of deposit, mostly customer and broker
CD's, and IRA accounts. The rise in average term notes was attributed to four
new term notes issued during the second quarter of fiscal 1997.
The average cost of funds for the first quarter of fiscal 1998 increased ten
basis points to 5.35% from 5.25% in fiscal 1997 contributing to a rise in
interest expense of $141,000. This increase in the average cost of funds
responds mainly to a rise in the cost of repurchase agreements of 85 basis
points to 5.42% from 4.57%. This increase was due to the replacing of 936 repos,
which currently represent 39% of total repos portfolio versus 100% a year ago,
with higher-cost conventional repos. However, it is important to mention that
this increase in costs was in part mitigated by a favorable effect of $358,000
from the Group's interest-hedging activities.
NON-INTEREST INCOME
Table B at page 17 shows the fees and other non-interest income generated by the
Group for the first quarter ended September 30, 1997 and 1996. In the first
quarter of fiscal 1998 recurring non-interest income continued to be a major
driver of the Group's earnings improvement as it increased by $1.3 million or
36% to $4.8 million from $3.5 million reported in the same period of fiscal
1997.
Bank services fees and charges, which consist primarily of service charges on
deposit accounts, leasing fees and late charges collected on loans, decreased
by 21% to $1 million from $1.3 million in fiscal 1997. This net decrease was a
combination of a decrease in lease handling fees due to weaker a production
offset by an increase in fees on deposit accounts as a result of a larger volume
of deposit accounts.
Trust, money management and brokerage fees, which represented 44% of recurring
non-interest income for the first quarter of fiscal year 1998 grew to $2.1
million from $1.5 million in fiscal year 1997. This increase was possible to a
larger volume of accounts and assets managed by the trust department and the
assets gathered by the broker-dealer subsidiary. Mortgage banking activities
which rose to $1.5 million from $563,000 in fiscal 1997, an increase of $967,000
or 172%, was another category which contributed to the fiscal 1998 increase.
This was mainly attributed to a higher volume of mortgages originated and sold.
Non recurring non-operating interest income, which consists mainly of securities
and trading gains and losses, amounted to $211,000 for the first quarter of
fiscal 1998 compared to $127,000 in the earlier fiscal year.
NON-INTEREST EXPENSES
As shown on table C at page 17 recurring non-interest expenses for the first
quarter of fiscal 1998 increased by $1.2 million or 18% to $7.7 million as
compared to $6.5 million for fiscal 1997. The increase results mainly from
the expanded push in the retail area and higher outlays for support services
as the group's businesses continue to expand. The efficiency ratio, which is
the ratio of non-interest expense to the sum of net interest income and
recurring non-interest income, was 52.52% for the first quarter of fiscal
1998 compared to 52.40% a year ago. The expense ratio, which is the ratio of
net recurring operating expenses to average interest-earning assets, improved
to 1.11% for the first quarter of fiscal 1998, compared to 1.43% last year.
Employee compensation and benefits, the Group's largest expense category,
increased $400,000 or 12% to $3.8 million from $3.4 million in fiscal 1997. The
growth in personnel cost was led by an increase of $200,000 or 50% of the total
increase due to the increased headcount in response to the expanded sales force
and services. The Group's full-time equivalent employees amounted to 412 at
September 30,1997, up from 390 a year ago. The rest of the increase of the
total increase was a result of the greater use of variable based compensation
structure to compensate for higher productivity and sales efforts and to annual
performance merit increases. For the three months ended period variable
compensation represented 34% of total compensation versus 28% a year ago.
16
<PAGE>
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
SEPTEMBER 30,
-------------
1997 1996 %
-------- -------- -----
TABLE B - NON-INTEREST INCOME SUMMARY
BANK SERVICE FEES AND CHARGES $ 1,007 $ 1,274 (21%)
TRUST, MONEY MANAGEMENT AND BROKERAGE FEES 2,101 1,528 38%
MORTGAGE BANKING ACTIVITIES 1,531 563 172%
RENT AND OTHER OPERATING INCOME 186 182 2%
-------- -------- -----
RECURRING NON-INTEREST INCOME 4,825 3,547 36%
-------- -------- -----
NET GAIN ON SALE OF INVESTMENTS 111 157 (29%)
TRADING ACCOUNT INCOME 110 (30) (467%)
-------- -------- -----
NON RECURRING NON-INTEREST INCOME 221 127 74%
-------- -------- -----
TOTAL NON-INTEREST INCOME $ 5,046 $ 3,674 37%
-------- -------- -----
TABLE C - NON-INTEREST EXPENSES SUMMARY
COMPENSATION AND BENEFITS $ 3,850 $ 3,441 12%
OCCUPANCY AND EQUIPMENT 1,174 996 18%
PROFESSIONAL FEES 339 309 10%
ADVERTISING AND PROMOTION 665 341 95%
REAL ESTATE OWNED EXPENSES 29 67 (57%)
INSURANCE 122 273 (55%)
COMMUNICATIONS 378 260 45%
OTHER OPERATING EXPENSES 1,169 843 39%
-------- -------- -----
TOTAL RECURRING NON-INTEREST EXPENSES 7,726 6,530 18%
SAIF ONE-TIME ASSESSMENT -- 1,823 (100%)
-------- -------- -----
TOTAL NON-INTEREST EXPENSES $ 7,726 $ 8,353 (8%)
-------- -------- -----
EFFICIENCY RATIO 52.52% 52.40%
-------- --------
EXPENSE RATIO 1.11% 1.43%
-------- --------
COMPENSATION AND BENEFITS AS A PERCENTAGE (%) OF:
TOTAL AVERAGE ASSETS 1.34% 1.53%
-------- --------
TOTAL AVERAGE INTEREST-EARNING ASSETS 1.47% 1.65%
-------- --------
<PAGE>
All other recurring non-interest expenses for the first quarter of fiscal
1998 grew by $ 790,000 or 26% to $3.8 million from $3.09 million in fiscal
1997. This increase was mainly attributed to increases in advertising and
promotion of $324,000 or 95% and business development and general operating
costs of $444,000 or 41%. The increase in advertising and promotion resulted
mainly from the ongoing campaign to promote the Group's image and the
launching of new products and services. Increases in communications and loan
servicing expenses were the main contributors in the growth of business
development and general operating costs.
On September 30, 1996 the United States Congress approved and President
Clinton signed into law a bill to recapitalize the Savings Association
Insurance Fund. This bill called for a special one-time charge on
institutions holding SAIF deposits on March 31, 1995 of approximately 66
basis points. Accordingly, Oriental recorded a special reserve of $1.8
million net of taxes of $470,000 during the first quarter of fiscal 1997 to
account for its share of the one-time payment of FDIC insurance premium.
PROVISION FOR INCOME TAXES
The provision for income taxes for the first quarter of fiscal 1998 amounted
to $968,000 versus $485,000 in fiscal 1997. The effective tax rate was 16.4%
in fiscal 1998 compared to 14.53% for the same quarter of fiscal 1997. The
Group has maintained an effective tax rate lower than the statutory rate of
39% mainly due to interest income earned on certain investments and loans
which is exempt from income taxes, net of the disallowance of expenses
attributable to the exempt income. In addition, during 1997 the Group created
OBT International Branch to take advantage of additional tax incentives
available under the International Banking Center law.
On July 22, 1997 the governor of Puerto Rico signed into law changes to the
Puerto Rico Tax Code that will impact the group's operations going forward.
Under this law effective august 1, 1997, interest earned on FHA , VA loans
and securities backed by such loans originated after July 31, 1997, which
were previously tax exempt (after-disallowance of related expenses) will
begin to pay income taxes except for FHA mortgages for new construction
projects. The legislation does not alter the tax-exempt status of FHA and VA
loans and securities backed by such loans originated prior to July 31, 1997.
this will reduce the amount of tax-exempt mortgages originated in the Puerto
Rico market and decrease the overall level of tax-exempt interest earned by
group. Management believes the increased operations of obt international
branch will mitigate the expected rise on the group's income taxes as result
of this new bill. Thus, management does not expect this change to have a
significant impact on the group's financial condition or results of
operations.
PROVISION FOR LOAN LOSSES
For the first quarter of fiscal 1998 the Group provided $1.3 million for loan
losses compared with $900,000 for fiscal 1997, an increase of $400,000 or
44%. The increase in the provision for fiscal 1997 was based mostly on the
growth of the Group's portfolio, as well as a rise in net charge-offs
experienced by the Group and current and expected economic conditions. Table
D at page 19 sets forth an analysis of the activity in the allowance for
loan losses and presents selected loan losses statistics for the quarters
ended September 30, 1997 and 1996.
Net charge-offs for the first quarter of fiscal 1998 totaled $1.3 million or
0.09% of average loans, compared to $768,000 or 0.06% in fiscal 1997. The
level of net charge-offs recorded in fiscal 1998 was primarily associated to
the losses experienced in the consumer loans and financing leases portfolios.
The Group maintains an allowance for loan losses on its portfolio at a level
that management considers adequate to provide for potential losses based upon
an evaluation of known and inherent risk. Oriental's allowance for loan
losses policy provides for a detailed quarterly analysis of possible losses.
The analysis includes a review of historical experience, value of underlying
collateral and current economic conditions, among others. Based upon the
results of this quarterly analysis, loan loss reserves are computed for each
portfolio.
<PAGE>
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
SEPTEMBER 30,
-----------------------
1997 1996
---------- ----------
TABLE D -ALLOWANCE FOR LOAN LOSSES SUMMARY AND LOAN LOSSES STATISTICS
BALANCE AT BEGINNING OF PERIOD $ 5,408 $ 4,496
---------- ----------
PROVIISON FOR LOAN LOSSES 1,300 900
---------- ----------
CHARGE-OFF'S (1,653) (1,002)
RECOVERIES 399 234
---------- ----------
NET CHARGE OFF'S (1,254) (768)
---------- ----------
---------- ----------
BALANCE AT END OF PERIOD $ 5,454 $ 4,628
---------- ----------
---------- ----------
CHARGE-OFF'S:
CONSUMER $ 580 $ 279
OVERDRAFT - -
REAL ESTATE 61 -
AUTO LEASES 898 400
EQUIPMENT LEASES 85 210
COMMERCIAL AND OTHERS 29 113
---------- ----------
1,653 1,002
---------- ----------
---------- ----------
RECOVERIES:
CONSUMER 76 42
OVERDRAFT 1 6
REAL ESTATE - -
AUTO LEASES 217 121
EQUIPMENT LEASES 105 54
COMMERCIAL AND OTHERS - 11
---------- ----------
399 234
---------- ----------
---------- ----------
NET CHARGE OFF:
CONSUMER (504) (237)
OVERDRAFT 1 6
REAL ESTATE (61) -
AUTO LEASES (681) (279)
EQUIPMENT LEASES 20 (156)
COMMERCIAL AND OTHERS (29) (102)
---------- ----------
$ (1,254) $ (768)
---------- ----------
---------- ----------
LOANS:
OUTSTANDING $ 557,996 $ 489,081
---------- ----------
---------- ----------
AVERAGE $ 548,938 $ 481,118
---------- ----------
---------- ----------
RATIOS:
RECOVERIES TO CHARGE-OFF'S 24.1% 23.4%
---------- ----------
---------- ----------
NET CHARGE-OFF TO AVERAGE LOANS 0.91% 0.64%
---------- ----------
---------- ----------
PROVISION FOR LOAN LOSSES TO NET CHARGE-OFFS 1.04 1.17
---------- ----------
---------- ----------
ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS 0.98% 0.95%
---------- ----------
---------- ----------
<PAGE>
FINANCIAL CONDITION COMMENTS
ASSETS
ASSETS OWNED
Oriental's total assets at September 30, 1997 reached $1.16 billion, an
increase of 26% when compared to $919 million at the end of the same quarter
of fiscal 1997. Average assets for the first quarter of fiscal 1998 were
$1.15 billion compared to $902,000 million for fiscal 1997, a 28% gain.
Refer to Table E at page 21 for the Group's assets summary.
At September 30, 1997 interest-earning assets amounted to $1.1 billion
compared to $866 million at September 30, 1996. This increase was the
combination of a growth in investment and trading securities of $160 million
or 42%, to $541 million from $381 million at the end of the first quarter of
fiscal 1997, assisted by a higher volume of loans receivable and loans held
for sale, net of the allowance for loan losses, of $69 million, or 14%, from
$484 million at September 30, 1996 to $553 million at September 30, 1997.
Oriental's investment and trading securities, the largest component of
interest-earning assets, consists mainly of U.S. Treasury notes, U.S.
Government agencies bonds, mortgage-backed securities and P.R. Government
municipal bonds. The investment portfolio is very high quality, approximately
98% is rated AAA at the end of the first quarter of fiscal 1998, and
generates a significant amount of tax exempt interest which lowers the
Group's effective tax rate. Also during fiscal 1997 the Group formed an
International Banking Entity (IBE) which houses U.S. mortgage-backed
securities in a tax-advantaged setting.
The increase of $160 million in investment and trading securities was driven
by a growth in mortgage-backed securities of $95 million or 42% to $322
million at September 30, 1997 from $227 million a year ago as Oriental
continues its strategy of pooling guaranteed real estate loans into
mortgage-backed securities. During the first quarter of fiscal 1998,
Oriental converted $39 million of loans held for sale into mortgage-backed
securities. Also a significant growth in tax exempt U.S. government and
agency obligations of $73 million or 57% contributed to the increase in this
earning asset component. U.S. government and agency obligations, which picks
up a higher after-tax yield since they are exempt from Puerto Rico taxes and
have no prepayment or credit risk are an attractive investment for Oriental.
Refer to Table F at page 21 for the Group's investments summary and
composition.
Loans are the second largest category of the Group's earning assets but the
most profitable. At September 30,1997, total loans were $553 million
compared with $484 million at the end of the same quarter of fiscal 1997,
for an increase of $69 million or 14%. This rise was led by increases in the
real estate and consumer portfolios of $43 million or 18%, and $16 million or
19%, respectively. The growth in Group's loan portfolio was mainly attained
due to strong marketing efforts coupled with the launch of new products.
At September 30, 1997 the loan portfolio mix was similar to the one at the
end of the preceding fiscal year as real estate loans represented 51% of the
total portfolio, while lease financing were 30%, consumer loans 18%, and
commercial loans comprised 2%. This compares with 49%, 32%, 17% and 2%,
respectively, at the end of the same period of fiscal 1997 for the same
categories. Table G at page 21 presents the composition of the Group's loan
portfolio at September 30, 1997 and 1996.
FINANCIAL ASSETS GATHERED OR MANAGED
As shown on Table H at page 21 Oriental continued to experience a favorable
growth in its diversified asset base which contributed to income expansion
across all its business lines. Total financial assets owned or managed
increased 32% to $3.3 billion at September 30, 1997 from the $2.5 billion
owned or managed one year ago. As of September 30, 1997, total financial
assets consisted of $1.16 billion owned by the Bank, $1.1 billion managed by
the trust, $544 million gathered by the broker-dealer and $533 million in
mortgages serviced for third parties. Detailed information concerning each of
the items that comprise the Group's financial assets managed follows:
- - GROUP'S OWNED ASSETS - Refer to the section above for detailed information
concerning this item.
- - TRUST ASSETS MANAGED - Total assets managed by the trust department
increased 24% to $1.1 billion at September 30, 1997, up from $890
million reported at September 30, 1996 . The most significant assets
managed are individual retirement accounts (IRA) which increased to
$346 million at September 30, 1997 from $316 million at September 30,
1996. Oriental Trust offers three IRA products: (1) IRA-Exenta, a tax
exempt unit investment trust, (2) Multi-IRA, a taxable fixed income
account and (3) Investors IRA, for which the yield is tied to the
performance of the stock market. Other assets managed include 401 (K)
and Keogh retirement plans, custodian and corporate trust accounts.
- - ASSETS GATHERED BY BROKER-DEALER - Since its inception in April 1993,
Oriental's broker-dealer subsidiary offers a wide array of investment
vehicles to its clients base. Presently these include: - Fixed and
Variable Annuities. - Tax-advantaged Fixed Income Securities. - Mutual
Funds - Stocks and Bonds. Total assets gathered by the broker-dealer
from its customer investment accounts increased by 81% to $544 million
at September 30, 1997 from $300 million at September 30, 1996.
20
<PAGE>
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
SEPTEMBER 30,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
TABLE E - ASSETS SUMMARY
INVESTMENT AND TRADING SECURITIES $ 541,071 $ 381,470
TOTAL LOANS,NET 552,542 484,453
------------ ------------
INTEREST-EARNING ASSETS 1,093,613 865,923
NON INTEREST-EARNING ASSETS 68,151 53,296
------------ ------------
TOTAL ASSETS $ 1,161,764 $ 919,219
------------ ------------
------------ ------------
TABLE F - INVESTMENTS SUMMARY AND COMPOSITION
MORTGAGE BACKED SECURITIES $ 322,783 $ 226,675
INVESTMENT AND TRADING SECURITIES 203,175 129,532
MONEY MARKET INVESTMENTS AND FHLB STOCK 15,113 25,264
------------ ------------
TOTAL INVESTMENT SECURITIES $ 541,071 $ 381,471
------------ ------------
------------ ------------
TABLE G - LOANS COMPOSITION SUMMARY
REAL ESTATE LOANS 281,912 238,518
CONSUMER LOANS 98,656 83,014
COMMERCIAL LOANS 11,129 9,089
CONSTRUCTION LOANS - 218
FINANCING LEASES 166,299 158,241
------------ ------------
TOTAL LOANS AND LOANS HELD FOR SALE 557,996 489,080
ALLOWANCE FOR LOAN LOSSES (5,454) (4,628)
------------ ------------
TOTAL LOANS, NET 552,542 484,452
------------ ------------
------------ ------------
COMPOSITION AS A %:
REAL ESTATE LOANS 51% 49%
CONSUMER LOANS 18% 17%
COMMERCIAL LOANS 2% 2%
CONSTRUCTION LOANS 0% 0%
FINANCING LEASES 30% 32%
------------ ------------
TOTAL LOANS AND LOANS HELD FOR SALE 100% 100%
------------ ------------
------------ ------------
TABLE H - FINANCIAL ASSETS SUMMARY
TOTAL GROUP ASSETS OWNED $ 1,161,800 $ 919,300
TRUST ASSETS MANAGED 1,104,300 890,100
LOANS SERVICED TO THIRD PARTIES 533,300 430,300
ASSETS GATHERED BY BROKER-DEALER 543,500 300,500
------------ ------------
TOTAL FINANCIAL ASSETS $ 3,342,900 $ 2,540,200
------------ ------------
------------ ------------
</TABLE>
<PAGE>
- - LOANS SERVICED FOR THIRD PARTIES - The Group's loan administration
division services mortgage loans for third parties which include federal
agencies such as GNMA, FNMA and FHLMC, as well as local issuers such as
the P.R. Housing Bank. Total loans serviced for third parties
increased 24% to $533 million at September 30, 1997 from $430 million at
September 30, 1996. In a move to strengthen its future earnings the
Group announced in September the sale of its servicing operation to
Doral Financial Corporation. Management expects the mortgage servicing
transaction to be completed by November 30, 1997. The divestiture of
the mortgage servicing operation is indicative of a wider strategy
guiding the Group to concentrate on trust, money management, brokerage,
leasing, personal loans and deposit accounts with the highest earnings
potential.
NON-PERFORMING ASSETS
As shown on Table I at page 23 at September 30,1997 the Group's
non-performing assets consist of the sum of non-performing loans, real estate
owned and repossessed assets. Detailed information concerning each of the
items that comprise non-performing assets follows:
- - DELINQUENT REAL ESTATE LOANS - Oriental classifies real estate loans
delinquent 90 days or more in non-accruing status. Due to the limited
supply of land in Puerto Rico, real estate market values have remained
stable. Even though these loans are in non-accruing status, based on
the value of the underlying collateral and the loan to value ratios,
management considers that no material losses will be incurred on this
portfolio. The estimated losses have been considered in the
determination of the level of allowances for loan losses as of September
30, 1997. Real estate loans are charged-off based on the specific
evaluation of the collateral underlying the loan.
- - DELINQUENT COMMERCIAL BUSINESS LOANS - Commercial business loans are
placed on non-accrual basis when they become 90 days past due. The
Bank's non-accrual commercial business loans at September 30, 1997
consisted of sixteen loans amounting to $944,000 (average of $59,000),
with three loans having balances exceeding $100,000. Of the total
balance, $541,000 are guaranteed by real estate. Commercial loans are
charged-off based on the specific evaluation of the collateral
underlying the loan.
- - DELINQUENT FINANCE LEASES - Leases are placed on non-accrual status when
they become 90 days past due. Oriental's non-accrual leases at
September 30, 1997 consisted of three hundred and thirty-two auto
leases amounting to $6 million (average of $18,000), and two hundred
thirty-nine equipment leases amounting to $2.5 million (average of $7,100).
At September 30, 1997, there were no non-accrual equipment leases over
$100,000.
- - DELINQUENT CONSUMER LOANS - Consumer loans are placed on non-accrual
status when they become 90 days past due. The Group's non-accrual
consumer loans consisted of three hundred thirteen loans amounting to
$2.6 million (average of $8,290).
- - REPOSSESSED ASSETS - Repossessed assets are initially recorded at
estimated net realizable value. Any additional losses on the
disposition of such assets are charged against the allowance for loan
losses at the time of disposition. The estimated loss on disposition of
such assets has been considered in the determination of the allowance
for loan losses. As of June 30, 1997 the inventory of repossessed
automobiles consisted of sixty-three units amounting to $ 1.1 million
(average of $17,300), and the inventory of repossessed equipment
consisted of twenty-eight units amounting to $465,000 (average of
$16,600).
- - FORECLOSED REAL ESTATE (OREO) - Foreclosed real estate is initially
recorded at the lower of the related loan balance or fair value at the
date of foreclosure. At the time of acquisition of properties in full or
partial satisfaction of loans, any excess of the loan balance over the
estimated fair market value of the property is charged against the
allowance for loan losses. The carrying value of these properties is
estimated to approximate the lower of cost or fair value less estimated
cost to sell. Any excess of the carrying value over the estimated fair
market value is charged to operations. Therefore, no material losses are
expected on the final disposition of OREO's. Management is actively
seeking prospective buyers for these foreclosed real estate properties.
LIABILITIES AND CAPITAL
LIABILITIES
As shown in Table J at page 23 at September 30, 1997 Oriental's total
liabilities reached $1.07 billion, reflecting an increase of $228 million
or 27% when compared to $839 million at September 30, 1996. Interest-bearing
liabilities, the Group's sources of funding, amounted to $1.04 billion at
September 30, 1997, an increase of $224 million or 28% as compared to $810
million at September 30, 1996. This increase was the result of a growth in
deposits and repurchase agreements of $126 million or 32% and $79 million or
35%, respectively.
22
<PAGE>
ORIENTAL FINANCIAL GROUP
SELECTED FINANCIAL DATA
(IN THOUSANDS)
SEPTEMBER 30,
-----------------------
1997 1996
---------- ---------
TABLE I - NON PERFORMING ASSETS
REAL ESTATE LOANS $ 5,258 $ 4,076
CONSUMER LOANS 2,593 1,671
COMMERCIAL LOANS 944 236
CONSTRUCTION LOANS - 211
FINANCING LEASES 8,542 4,833
---------- ---------
TOTAL NON ACCRUAL LOANS $ 17,337 $ 11,027
---------- ---------
NON-ACCRUAL LOANS $ 17,337 $ 11,027
REO 779 941
REPO VEHICLES 1,091 950
REPO EQUIPMENT 465 460
---------- ---------
TOTAL NON-PERFORMING ASSETS $ 19,672 $ 13,377
---------- ---------
% NON-ACCRUAL TO TOTAL LOANS 3.11% 2.25%
---------- ---------
---------- ---------
ALLOWANCE TO NON-ACCRUALS 31.46% 41.97%
---------- ---------
---------- ---------
% NON-PERFORMING TO TOTAL ASSETS 1.69% 1.46%
---------- ---------
---------- ---------
% NON-PERFORMING TO TOTAL CAPITAL 20.76% 16.68%
---------- ---------
---------- ---------
TABLE J - LIABILITIES SUMMARY
DEPOSITS $ 525,609 $ 398,743
REPURCASE AGREEMENTS 303,646 224,253
OTHER BORROWINGS 206,592 186,768
---------- ---------
INTEREST-BEARING LIABILITIES 1,035,847 809,764
NON INTEREST-BEARING LIABILITIES 31,161 29,234
---------- ---------
TOTAL LIABILITIES $1,067,008 $ 838,998
---------- ---------
TABLE K - CAPITAL AND CORRESPONDING REGULATORY CAPITAL RATIOS (IN PERCENT):
CAPITAL $ 94,756 $ 80,221
OUTSTANDING SHARES 9,966 9,883
DIVIDENDS DECLARED $ 1,229 $ 989
LEVERAGE CAPITAL 7.72% 8.40%
---------- ---------
---------- ---------
TIER 1 RISK-BASED CAPITAL 17.39% 17.77%
---------- ---------
---------- ---------
TOTAL RISK-BASED CAPITAL 18.47% 18.84%
---------- ---------
---------- ---------
TABLE L - MARKET PRICES AND STOCK DATA
CLOSING PRICE $ 28.80 $ 13.03
HIGH 29.70 13.08
LOW 22.60 13.00
BOOK VALUE 9.51 8.12
DIVIDEND PER SHARE 0.12 0.10
PAYOUT RATIO 24.90% 23.63%
---------- ---------
---------- ---------
DIVIDEND YIELD 1.71% 3.07%
---------- ---------
---------- ---------
The following provides the high and low prices of the Group's stock for each
quarter of the last two fiscal periods. Common stock prices were adjusted to
give retroactive effect to the stock splits declared on the Group's common
stock.
QUARTER ENDED HIGH LOW PER SHARE
SEPTEMBER 1997 $ 29.7 $ 22.6 $0.12
JUNE 1997 22.6 18.2 0.12
MARCH 1997 21.6 16.7 0.12
DECEMBER 1996 17.6 14.6 0.10
SEPTEMBER 1996 $ 13.1 $ 13.0 $0.10
23
<PAGE>
Deposits, the largest category of the Group's interest -bearing liabilities,
showed growth in all areas as they increased to $527 million at September 30,
1997, from $398 million at the same date last year. At the end of the first
quarter of fiscal 1998 deposits represented 51% of total interest bearing
liabilities versus 50% at the end of the preceding fiscal year. Demand and
saving deposits were up by $10 million or 11%, to $104 million at September
30, 1997, from $94 million at September 30, 1996 and certificates of deposit
rose by $116 million or 32%, to $418 million at June 30, 1997, from $302
million at September 30, 1996.
As of September 30, 1997 total borrowings amounted to $ 511 million compared
to $ 411 million at September 30, 1996. Oriental has a diversified source of
funding through the use of FHLB advances and borrowings, repurchase
agreements, term notes, notes payable and lines of credit. The increase in
borrowings was mainly due to increases in advances from the Federal Home Bank
of New York and repurchase agreements. The increase in total borrowings was
necessary to fund the increase in interest-earning assets experienced during
the period. A substantial number of these borrowings have floating rates
that are generally hedged through the Group's overall interest rate risk
management process discussed in the Note 8 of the attached Group's financial
statements.
CAPITAL AND MARKET PRICES, STOCK DATA AND DIVIDENDS
At September 30, 1997 Oriental's total capital increased by $14.5 million or
18% to $94.7 million, from $80.2 million at September 30, 1996. This
increase was the result of earnings of $18.6 million recorded during the
fiscal year increased by $716 thousand from stock options exercised and a
$2.1 million positive change in the valuation account for investment
securities available-for-sale. This increase was offset by $4.6 million in
dividends declared and $2.3 million used repurchase Oriental shares in the
open market.
The Group continues to be a "well capitalized" institution, the highest
classification available under the capital standards set by the Federal
Deposit Insurance Corporation. To be in a "well capitalized" position, bank
or bank holding companies must meet or exceed a leverage ratio of 5%, a Tier
1 risk-based capital ratio of 6% and a total risk-based capital ratio of 10%.
As of September 30, 1997 the Group had a leverage ratio of 7.72%; a Tier 1
risk-based ratio of 17.39%; and a total risk based capital ratio of 18.47%
compared to 8.40%, 17.77% and 18.84% ,respectively, at the same date in
fiscal 1997.
On August 11, 1997, the Group declared a five-for-four (25%) stock split on
its 8,054,015 shares of common stock outstanding at September 30, 1997. As a
result, 1,911,925 shares of common stock were issued on October 15, 1997 thus
increasing shares to 9,965,940.
The Group's common stock is traded in the New York Stock Exchange (NYSE)
under the symbol OFG. Refer to table L at page 23 for the high, low and
closing prices of the Group's stock for each quarter of the last two fiscal
periods. The price per share on the reported last sale price on the NYSE on
September 30, 1997 was $28.80. This represents an increase of 121% from the
last sale price a year ago of $ 13.03 already adjusted for the five-for-four
(25%) stock split. The book value at September 30, 1997 rose to $9.51 from
$8.12 reported at the same date last year.
During the first quarter of fiscal 1998, the Group declared dividends
amounting to $1.2 million compared to $989,000 in fiscal 1996, an increase
of $240,000 or 24%. This represents total dividends declared per common share
of $0.12 for the first quarter of fiscal 1998 versus $0.10 for the same
period of fiscal 1997, a 23% increase. The dividend payout ratio and dividend
yield for the quarter ended amounted to 24.9% and 1.71%, respectively,
compared to 23.63% and 3.07%, respectively, for the same quarter last year.
ASSET/LIABILITY MANAGEMENT
The Group through its Asset and Liability Management Committee (ALCO) has
developed policies whose primary goal is to enhance profitability while
maintaining an appropriate relationship between the amount of
interest-earning assets and interest-bearing liabilities that mature or
reprice during the same period. This difference is commonly referred to as a
"maturity mismatch" or "gap".
The Group is liability sensitive on a cumulative basis (negative one year
gap) due to its fixed rate asset composition being funded with shorter
repricing liabilities. However, since the traditional static gap
representation does not capture all of the complex factors that influence
asset and liability repricings, the Group places greater emphasis on
simulation analysis. The Group utilizes different rate and growth scenarios
to develop strategies to maintain its net interest income within the
prescribed policy limits.
The Group utilizes interest rate swaps as an interest rate risk hedging
mechanism. Under the swaps, the Group pays a fixed annual cost and receives
a floating ninety-day payment based on LIBOR. Floating rate payments
received from the swap counterparty correspond to the floating rate payments
made on the borrowings or notes thus resulting in a net fixed rate cost to
the Group. (See footnotes of the Group's Financial Statements included
herein).
The interest rate swap agreements are subject to the risk of non-performance
by the counterparty. The Group enters into interest rate swaps only with the
approved investment grade money center banks and major broker-dealers. The
Group has established policies that limit the maximum exposure to any one
counterparty. These policies are reviewed by the Board of Directors on a
yearly basis. At September 30, 1997, the Group had entered into interest
rate swap agreements with ten counterparties with a remaining average life of
approximately two years.
24
<PAGE>
LIQUIDITY
Liquidity refers to cash and other investments easily converted into cash
that are available to meet unanticipated requirements. The objective of the
Group's liquidity management is to ensure sufficient cash flow to fund the
origination and acquisition of assets, the repayment of deposit withdrawals
and the wholesale borrowings maturities, and meet operating expenses. The
Group's liquidity position is reviewed and monitored by the ALCO Committee on
a regular basis.
The Group's principal sources of funds are net deposit inflows, loan
repayments, mortgage-backed and investment securities principal and interest
payments, reverse repurchase agreements, FHLB advances and other borrowings.
The Group has obtained long-term funding through the issuance of notes and
long-term reverse repurchase agreements. The Group's principal uses of funds
are the origination and purchase of loans, the purchase of mortgage-backed
and investment securities, the repayment of maturing deposits and borrowings.
During the first quarter of fiscal 1997 President Clinton signed into law a
bill phasing out the tax incentives offered to manufacturing companies
operating in Puerto Rico under Section 936 of the Internal Revenue Code. The
phase out of the manufacturing tax benefits will occur over a ten-year
period, and the benefits related to the passive income (QPSII) were
eliminated effective July 1, 1996. Financial institutions and other eligible
borrowers in Puerto Rico have benefited throughout the years from the lower
cost of these QPSII funds.
The elimination of the Section 936 tax credit for the Puerto Rico
operations of U.S. companies and benefits to QPSII did not have a significant
impact on the Group's liquidity position. This was mainly due to the fact
that the law change came with plenty of warning, so the Group was able to
replace 936 funding with longer- term obligations. During fiscal 1997 the
Group locked-in about $185,000 million of non-cancelable long-term funding,
with maturities ranging from three to ten years.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared
in accordance with GAAP, which requires the measurement of financial
positions and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due
to inflation. Unlike most individual companies, substantially all of the
assets and liabilities of the Group are monetary in nature. As a result,
interest rates have a more significant impact on the Group's performance than
the general level of inflation. Over short periods of time, interest rates
may not necessarily change in the same direction or as much as the prices of
goods and services.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Group and its subsidiaries are defendants in a number of legal claims
under various theories of damages arising out of, and incidental to its
business. The Group is vigorously contesting those claims. Based upon a
review with legal counsel and the development of these matters to date,
management is of the opinion that the ultimate aggregate liability, if any,
resulting from these claims will not have a material adverse effect on the
Group's financial position or the result of operations.
ITEM 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
25
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On October 21 1997, the annual stockholders meeting of the Bank was held. A
quorum was obtained with 7,396,257 votes in person or by proxy, which
represented 92.3% of all votes eligible to be cast. The following proposals
were voted upon at the meeting with the following results:
- PROPOSAL 1: To elect three directors to three-year terms expiring with the
2000 Annual Meeting or until their successors have been elected and
qualified.
<TABLE>
<CAPTION>
NOMINEES FOR THREE-YEAR TERM VOTES FOR VOTES AGAINST VOTES WITHHELD
<S> <C> <C> <C>
Director #1 7,394,084 - (92.3%) 2,173 0
Director #2 7,391,894 - (92.3%) 4,363 0
Director #3 7,391,894 - (92.3%) 4,363 0
</TABLE>
- PROPOSAL 2 To consider and approve the adoption of the Oriental Bank and
Trust 1996 Incentive Stock option plan, which would, upon approval, reserve
the issuance 630,000 shares of the Group's common stock, $1.00 par value,
or approximately %8.0 of the Group's issued and outstanding common stock
as of the voting date of September 15, 1997 for issuance pursuant to the
terms thereof.
FOR: 4,585,215 (57.2%) AGAINST: 59,802 ABSTAIN: 2,751,240
----------------- ------ ---------
- PROPOSAL 3: Ratify the appointment of Price Waterhouse & Co. as the Bank's
independent auditors for the year ending June 30, 1997.
FOR: 7,394,244 (92.3%) AGAINST: 0 ABSTAIN: 2,013
----------------- ------ ---------
ITEM 5. OTHER INFORMATION - NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A- FINANCIAL STATEMENTS SCHEDULES
No schedules are presented because the information is not applicable or is
included in the Consolidated Financial Statements or in the notes thereto
described in 6(c) below.
B - REPORTS ON FORM 8-K
No current reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended September 30,1997.
C - EXHIBITS
Exhibits filed as part of this Form 10-Q
NO. EXHIBITS PAGE
---------- ----------------------- ----
27.0 Financial Data Schedule E-1
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ORIENTAL FINANCIAL GROUP INC.
DATE: November 14, 1997 BY: /s/ RICARDO N. RAMOS
------------------------ RICARDO RAMOS
SENIOR VICE PRESIDENT
FINANCE
DATE: November 14, 1997 BY: /s/ ROBERTO A. FERNANDEZ
------------------------ ROBERTO A. FERNANDEZ
SENIOR VICE PRESIDENT ACCOUNTING
AND LOAN ADMINISTRATION
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 13,724
<INT-BEARING-DEPOSITS> 4,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 35,046
<INVESTMENTS-HELD-FOR-SALE> 256,992
<INVESTMENTS-CARRYING> 233,920
<INVESTMENTS-MARKET> 236,333
<LOANS> 557,996
<ALLOWANCE> 5,454
<TOTAL-ASSETS> 1,161,764
<DEPOSITS> 525,609
<SHORT-TERM> 395,346
<LIABILITIES-OTHER> 31,161
<LONG-TERM> 114,892
0
0
<COMMON> 9,966
<OTHER-SE> 84,790
<TOTAL-LIABILITIES-AND-EQUITY> 1,161,764
<INTEREST-LOAN> 14,334
<INTEREST-INVEST> 8,726
<INTEREST-OTHER> 394
<INTEREST-TOTAL> 23,454
<INTEREST-DEPOSIT> 6,356
<INTEREST-EXPENSE> 13,569
<INTEREST-INCOME-NET> 9,885
<LOAN-LOSSES> 1,300
<SECURITIES-GAINS> 221
<EXPENSE-OTHER> 7,726
<INCOME-PRETAX> 5,905
<INCOME-PRE-EXTRAORDINARY> 5,905
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,937
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
<YIELD-ACTUAL> 3.57
<LOANS-NON> 17,337
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,408
<CHARGE-OFFS> 1,653
<RECOVERIES> 399
<ALLOWANCE-CLOSE> 5,454
<ALLOWANCE-DOMESTIC> 5,454
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
